Industry experts have welcomed The Pensions Regulator’s (TPR) guidance on governance and reporting of climate-related risks and opportunities, although concerns have been raised over the need for further clarification in some key areas.

TPR launched the eight-week consultation in July to seek views on draft guidance, which will sit alongside the new climate-related disclosure and reporting requirements that are coming into force from 1 October 2021.

Concerns have emerged, however, as Redington head of stewardship and sustainable investment strategy, Paul Lee explained that whilst the guidance is helpful for trustees and complements that already laid out by DWP, there are some areas where greater clarity and examples are needed.

“For example, schemes with fewer resources, either due to size or structure, will likely face considerable challenges in implementing all the relevant governance processes necessary to meet the requirements," he said.

"As such, we think that a case study signalling the resources required, and the sequencing of actions including timelines, meeting cycles and lessons learned, would prove helpful to schemes at the beginning of their journey."

Lee also called for additional guidance on what example steps schemes should take around strategy and scenario analysis, stating that this is currently more focused on identifying and assessing climate-related risks than on processes for managing these.

He continued: “In regards to risk management, we believe it’s vital that a scheme’s climate risk management process is not siloed from other risks a scheme faces. We would like focus in this area to be on encouraging schemes to take an integrated holistic view of all the risks faced (including climate change).

"The guidance highlights that including climate risk on the scheme's risk register is one way in which this can be done.

"Given the complexity and difference in nature of climate risks to other risks scheme face though, case studies showing how these can be mapped to existing risk types on a scheme's risk register, would go some way in helping trustees implement this.”

Lee suggested that it should be stressed that risk mitigation following assessment of climate risk does not have to come in the form of divestment or portfolio changes, warning that this may be short term and promote unintended consequences, such as limiting the ability of the real economy to make the required decarbonisation transition.

“We would also like to see additional guidance for trustees on the considerations that should go into setting specific climate-related targets, to ensure this does not create a tick-box approach,” he added.

In addition to this, the Employer Covenant Practitioners Association (ECPA), has called for greater clarification as to how trustees and sponsors should report on climate-related risks and opportunities from a covenant perspective, highlighting this as “critical” to ensuring that climate risk is being managed in an integrated way.

In particular, the ECPA response called for more information on the extent to which TPR expects employers to be able to limit the amount of information that they provide to trustees on the grounds of confidentiality given the public nature of trustees’ reports.

ECPA chair, Andy Palmer, commented: “For some employers the impact of climate-related risks and opportunities on their covenant could be significant and require considerable investment to be made or significant strategic decisions to be taken.

"The commercial sensitivities around these matters could be such that public disclosure would be strongly resisted.

“It also would be helpful for TPR to reiterate the targets that trustees set should be scheme-specific and should not conflict with trustees’ fiduciary duties, or the investment policies stated in the Statement of Investment Principles.

“An excessive focus on portfolio optimisation to meet targets at the expense of scheme objectives could be contrary to trustees’ fiduciary duty under trust law. There is no expectation that trustees should set targets which require them to divest or invest in a given way, and the targets are not legally binding.”

Premier head of investment consulting, Mark Hodgson, also agreed that TPR has done a “good job” of driving the issue of climate change up and providing “solid clear guidance”, clarifying however, that TPR should engage with schemes by offering advice, at least initially, with trustees and schemes that do not quite measure up.

“If requirements on trustees are made too onerous it will be the smaller schemes with fewer resources that suffer the most," he warned.

"Advisers and consultants have a role to play here; they, of course, need to be commercial but they also need to prioritise and be pragmatic and keep a sharp focus on streamlining the reporting process."

Hodgson warned that beyond reporting, the "key hurdle" that must be overcome in the shift to net zero is capacity, despite the progress made as a result of asset managers stepping up in recent years.

"The trouble remains that if every scheme went fully green overnight, there is still not enough capacity across strategies in the market to accommodate them, so at the same time as schemes need to step up reporting, institutional asset managers also need to provide sufficient investment solutions," he concluded.

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